Investing early for our son’s future

I graduated from the University of Guelph nearly ten years ago with a high blood caffeine concentration, an affinity for the Dave Matthews Band and farmers markets, lifelong friendships, an honours degree, and last but certainly not least a massive pile of student loans.  Entering the workforce was accompanied by the harsh realization that a decent chunk of my income would need to be allocated to debt repayment and it would take a long … long … time to recover.   I am very grateful for my education, and for my parents who truly provided the most support they could along the way,  however I would undoubtedly be much further ahead had I left school without that heavy financial burden.

Every experience in life, positive or negative, shapes who we are.  We can choose to sift through each adventure to find the lessons, or we can let the opportunity for growth pass us by.  In this case, I believe it’s important that I use my experience with student debt as a learning opportunity for our son.  I plan on ensuring that he understands loan logistics and repayment time-frames, as well as the importance of planning in advance for his education costs.

I know it’s never too early to start planning for the future, so this week I sat down with my friend (and financial planner) Stephanie Armstrong from Boden & Associates to get answers to all my questions about Registered Education Savings Plans (RESPs).

I can’t be the only momma out there who has questions about saving for their children’s future, so I thought I’d share our chat!

OK, so how can we get the best ‘bang for our buck’ when it comes to RESPs?

SA: With RESPs the government will match 20% of anything up to a maximum of $2,500 that you contribute for each year until your child reaches the age of 18. Which means for every $2,500 you contribute the government will give you $500. That would be the best place to start. On top of that, to get even more of a benefit you should invest that account in the highest risk tolerance you as the investor could tolerate. Allowing you to achieve the largest growth on the money you are putting away for your future scholar!

Maternity leave isn’t exactly lucrative.  If we can’t afford to contribute the maximum is it still worth opening one?

SA: Absolutely, any amount helps and grows over time. No matter what you contribute the government does give you that free 20% grant! Therefore, my advice is to start. No matter what amount… stay consistent and keep contributing. In the long run you will be so surprised how quickly this does build up. Continue to increase your contribution if you can as the years go on!

How can we make the payments? Are they taken automatically on a schedule or do we deposit lump sums?

SA: RESP’s are quite flexible, we have clients doing one or both. Whether you want to start with a $25 per month pre-authorized payment or a lump sum of $300. Either way works! You can also set up a monthly payment and then contribute a chunk into the account on holidays or birthdays. However you’d like, RESPs are able to accommodate!

I know my mom is going to want to get in on this.  How can other family members contribute?

SA: Family members such as grandparents or aunts and uncles are absolutely able to contribute. If they want to make a monthly contribution we can just add them to the account as contributors. If they want to make lump sum payments here and there that is also possible. Who wants to turn down money?

When can our son cash in the money? Are there any restrictions?

SA: This is an interesting question that we do get quite often! Absolutely there are some restrictions, but very few! Once your child has a letter stating that they have been accepted to a post-secondary program they are able to access the RESP and pull any amount of money out of that account. There are no restrictions on how they spend the money or on what. They are able to use it for groceries, a car, tuition, residence, or even to use as a down payment on a house. That money is there to be used.

Are there any tax implications for us? Or for him when he cashes them in?

SA: There is no tax implication involved for the parents. There is also no tax on any of the contributions. The only tax is on the growth and grant portion of the RESP.  This means that when the money is being taken out only the grant and growth is taxed and at the level of the child’s income. Most 18 year olds are working but in the lowest tax bracket there is; therefore the tax amount would be quite trivial.

They really seem like a win-win situation! Being a new mom yourself, any other tips?

SA: RESPs are such a great opportunity for all new parents. Something that really got me thinking about investing in my own child’s future is the idea of using the Child tax benefit. Here’s a table to show how it could work:

Potential RESP Savings over 18 years using government grants
Invested Universal Child Care Benefit (UCCB) (6 years x $160/mth) + (12 years x $60/mth) =$20,160
Canada Education Savings Grant (CESG) ($0.20/dollar contributed)= $4,032
RESP Balance after 18 years $56,005*

*Assumes the investment of the full UCCB

Thanks Steph! How can people find you if they have more questions or want to open an RESP for their kids?

Stephanie Armstrong

Live like today is your last day but let me help you plan as if you’ll live forever!

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